New economy & last mile real estate - sectors presenting investment opportunities within the "industrial" asset class

Our objective is to examine these evolving sectors of the economy in the context of real estate, land use and property-driven investment, but also understanding opcos, technologies and business models throughout the last mile in order to identify investment opportunities in operating business throughout the ecosystem. 

As we develop the blog, our interests lie in the areas involving the last mile ecosystem, new economy industries, industrial real estate and mobility infrastructure. These are not new concepts or terms, but we apply them a little differently as some terms and concepts are rooted in industries other than real estate anyhow. The following definitions reflect our perspective on this sector and have been conceptualized to allow for some flexibility:

• Last Mile - the last mile is now heavily referred to in industrial real estate coverage as it relates to last mile distribution centers, and therefore what is now a household term in real estate investment circles, is courtesy of the logistics industry. The last mile is also ‘a thing’ in the telecom industry. We are broadly using last mile to describe a geography in which real estate is being utilized by a range of complementary innovation-driven industries, a common example being logistics properties powered by e-commerce growth. The ecosystem that we discuss adds into the conversation transportation networks, operating companies, complementary service businesses, infrastructure and systems needed to support last mile uses and the underlying real estate. We think the last mile will have to evolve significantly in the future from its current state, which will present both real estate and ecosystem investment opportunities.

• New Economy Industries - this is not buzzword central, but we can’t think of any better way to describe the types of industries that are our primary interest other than new economy. Actually we are interested in old industries that are forward looking about their real estate strategies as well, but we will highlight emerging and growth industries that are powered by technology, are utilizing real estate in new and different ways and also tend to operate within the last mile where there is considerable interplay between and connectivity among the various sectors. We breakdown specific new economy industries that have established or growing real estate footprint in a summary chart below.

• Industrial Real Estate - the industrial real estate asset class used to be the least visible, understood and flashy among the four traditional food groups. Industrial is a catch-all category that includes everything from warehouses to factories to fleet surface parking lots to power plants. Characterized by land uses and intensity profiles that historically were viewed as incompatible with other non-industrial land uses, particularly housing, industrial zoning districts were therefore established in parts of the city that were off the beaten path, adjacent to waterways and highway networks.

Today, industrial zones contain many of the most popular investment property targets (distribution centers) and are typically located within our definition of the last mile along with higher intensity zoned commercial, mixed-use districts and special purpose districts . Industrial is still an applicable and appropriate classification for this asset class, although the traditional food group category name has a legacy connotation and is now too generalized to describe the tech-driven, dynamic economic activity and innovation occurring in these zones. The common underlying link among growth industries within the industrial asset class is technology and innovation.

In previous decades as traditional manufacturing and warehousing economies declined, many industrial areas were vacated and structures became obsolete as these zones experienced disinvestment. Consequently, the best located industrial zoning districts within proximity and connectivity to central business and residential districts were rezoned to allow for a broader mix of uses. Familiar examples of former industrial areas that were rezoned are Williamsburg, Brooklyn and Long Island City, Queens. Rezonings were the catalyst for a residential and mixed-use development boom in these areas, while greatly diminishing land zoned for industrial use, which has manifested into supply constraints for industrial zoned land. We’ll discuss the implications of these re-zonings in a future blog post that will cover a deep dive into New York City’s “M-Zones”.

• Mobility Infrastructure - We think that mobility infrastructure goes hand in hand with the evolution underway in the last mile, not to mention beyond densely populated urbanized areas. As the last mile becomes more congested and intense with increased traffic due to shifts in commerce, we are interested in land use and real estate implications and opportunities generated by the EV market. As EV adoption accelerates over the next decade as it is projected, existing real estate already is and will continue to have to be reconfigured to accommodate charging infrastructure. New business and real estate models will have to be developed to serve both the consumer and commercial fleet markets. We will also refer to mobility infrastructure in connection with AVs, however our current position is that there are many more technology and public realm challenges the AV market has to overcome in order for this form of mobility to have any significant impacts on real estate and land use within the last mile.

Industries comprising the new economy

The majority of our blog posts will be focused on new economy industries, companies and economic activity that have a significant impact on real estate and land use. Now that we have outlined our definitions of the new economy and last mile, the below summary chart identifies specific industries (and real estate) that we are most interested in. We have loosely grouped together similar or related industries:

A brief background and evolution of interest in new economy and last mile real estate

Industrial and resource driven economies, land use and real estate associated with industries operating in these sectors are well known from our previous experience in Southwestern Pennsylvania. Additionally, Pennsylvania’s strategic location and interstate network also serves as a critical link between large population centers along the I-95 corridor and markets in the Midwest and interior U.S. Accordingly, key longstanding logistics real estate submarkets in the mid-Atlantic/northeast region including the Lehigh Valley and I-78/I-81 corridor are located in Pennsylvania.

Our interest and experience in urban industrial real estate began five + years ago when we were involved with some of the early last-mile logistics real estate investment sales transactions in New York City’s Outer Boroughs. Up until this time, New York City of course had a rich industrial history but most of the industrial zones didn’t experience strong transaction volumes and these areas were not known well by large numbers of real estate investment professionals. As e-commerce grew, so did interest in last mile logistics properties. Land and other assets located in these land supply constrained areas became desirable as it became clear that e-commerce was not a trend, but a shift in commerce with a long runway ahead requiring new warehouse, fulfillment and distribution real estate. As market interest grew, a handful of developers emerged and began seeking sites that could accommodate large footprint, multi-level distribution centers. A new product in the U.S. that was only built by a limited number of developers in for example, the Puget Sound market, was now being pursued in the most densely populated market with the most expensive land in the country. High land and specialized construction costs required careful deal structuring and ultimately risks on new real estate business models to make the development project financially feasible.

Since the real estate market for industrial assets became frenzied and we concluded that these shifts in demand for property and implications for land use are a result of a larger shift in commerce and the economy as opposed to a reactionary trend, we shifted our attention to focus on 1) the physical characteristics, composition, connectivity and ownership of real estate in “M-zones” – which we’ll cover more of in a future post and 2) the underlying industries, businesses and technologies driving demand for real estate in the last mile.

Opcos, technology and Industries Behind the Last Mile Real Estate Boom

The pandemic accelerated our learning curve on non-real estate aspects of the last mile, what we refer to as the ecosystem. One of the first projects we worked on was building an e-commerce website for a bricks and mortar business so that they could reach their customers in new ways. The project entailed all aspects of e-commerce including fulfillment, delivery, BOPIS solutions and really opened up the floodgates with exposure to these areas and their technology-driven businesses. Subsequent projects and advisory engagements including the areas of RE/Proptech and EV charging infrastructure solidified our interest in this space as we had a better connection to the real estate as a result of understanding the users, occupants and tenants’ businesses and site selection criteria.

Taking into consideration the institutional composition, sophistication and technology driving real estate investment and land use evolution in this area, we think it is more critical than ever to understand the underlying industries, companies and technologies and not simply the real estate in order to be positioned for investment opportunities including and outside of bricks and mortar assets Many businesses operating in these industries also can be characterized as essential services, another topic we will cover in a future post.

Thanks for reading.